Tuesday, November 12, 2013

Why would SIDBI promote a 'caste-based' venture fund?

It's being called India's first 'social impact' venture capital fund, a phrase that is causing quite a stir. But before we proceed to the debate, let's rewind a little.

A few months ago, the Small Industries Development Bank of India (SIDBI) had announced that it would provide Rs 10 crore to a venture capital fund launched by the Dalit Indian Chamber of Commerce and Industry (DICCI).

Any new fund that promotes SME businesses deserves a round of applause, and, being a 'social impact' fund, so much the better, right? Not quite.

Now, SIDBI is well within its rights to support the fund but why would the bank want to promote a 'casteist' fund? There are some who argue that 'social impact' and 'cast-based' are two very different things and, although no one's breaking the law here, the very intent to support a Dalit fund is suspect.

First, let's take a look at the law. SIDBI was set up in 1990 under an Act of Parliament and its primary objective is to promote, finance and develop the micro, small and medium enterprises (MSMEs) in our country. Its shareholders include a clutch of public financial institutions including the Life Insurance Corporation of India.

The DICCI SME fund was set up as a Category I, Alternate Investment Fund that would be regulated by SEBI. This category permits the setting up of both an SME fund and a social venture fund. Now, while 'social ventures' usually aim to ameliorate social issues, where an SME would, say, devise means to provide basic amenities or provide employment opportunities in socially backward regions, the DICCI SME fund, its 'social impact' tag notwithstanding, has an altogether different objective. Its sole purpose is to support entrepreneurial initiatives by people from the Schedule Castes and Schedule Tribes (SC/STs), regardless of the nature of the ventures. And this is tantamount to promoting a caste, not a social initiative.

Still, in keeping with the law, the DICCI SME fund has received the approval of market regulator, the Securities and Exchange Board of India (SEBI), to raise funds in the range of Rs 500 crore over the next 10 years. Under the Alternate Investment Fund regulations that SEBI introduced in May last year, a social venture has been defined as any venture, either a trust or a society or even a venture capital undertaking or an LLP, whose purpose is to promote social welfare or solving social problems. And therein lies the rub. Is promoting a caste the same as 'social welfare'?

DICCI was established 8 years ago, and, according to its website, it encourages entrepreneurship among Dalit youth. Apart from the questionable move to equate caste promotion with social welfare, there is another knotty legal issue at stake - is promoting a fund set up to promote ventures on the basis of caste, constitutionally valid? And should public financial institutions promote the fund's cause?

The DICCI SME fund is notably the result of the Public Procurement Policy announced by the government in March last year. Accordingly, Public Sector Enterprises would procure at least 20 per cent of their requirement of goods and services from MSMEs. Of this, 4 per cent (of this 20 per cent) of procurement would come from MSMEs run by SC/STs.

This brings us to the next level of the debate: by setting up the fund, has SEBI not contravened Articles 14 and 15 of the Constitution? Additionally, by contributing to this fund, has not SIDBI contravened with the very same articles?

Prima facie, it appears that SIDBI's investment in the DICCI SME fund contravenes with Article 14 and 15 of the Constitution. Article 14 refers to equality before law and Article 15 pertains to prohibition of discrimination on grounds of religion, race, caste, sex or place of birth. But, cleverly, through an amendment, Article 15(4) was brought about to exclude SC/STs.

This exclusion has been consistently argued in various Supreme Court cases. The most interesting of these cases is the Indra Sawhney vs Union of India case before the Supreme Court in 1993. Although the case dates back more than 20 years, it is more relevant today than ever before. The court had examined the validity of Article 15 and 16 of the Constitution and observed that 'backward' is not a static definition. With social and educational advancement, people from this social category may be no more 'backward' than persons from other classes in terms of education and status, the court observed.

The case makes a reference to earlier cases that were heard in the 1960s in various states, where judgments consistently decried the unequal status of certain classes in India. The case mentions that for the purpose of Article 15(4), 'backwardness' must be both social and educational. In fact, the apex court maintained that caste per se cannot be the sole criterion to determine 'backwardness'.

True to the observation of the court, there have been marked changes in the economic status of Dalits, so much so, that the DICCI boasts billionaire entrepreneurs among its brethren! Thus, by investing in a fund that promotes unequal causes, this very act deepens the rift among castes. Shouldn't SIDBI therefore be much more pragmatic while allocating its resources?

There's just one other thing: while speaking at the DICCI SME Fund launch in Mumbai, Finance Minister P Chidambaram had said, "Every branch of a bank must handhold at least one Dalit entrepreneur. With close to 1,00,000 bank branches, a hundred thousand flowers will bloom." This is election-speak at its best. And in the battle between politics and pragmatism, the ballot has already been cast.